Morettini on Management

General Management and Marketing Advice for Software and Tech Companies

Category: Product Marketing/Management

Integrating the Marketing and Engineering Functions at Technology Companies

In most tech companies, Product Marketing and Product Development/Engineering are managed separately. There is usually a VP over the Product Development function and another over the overall marketing function, which usually includes future product marketing/planning.

While this is certainly an appropriate way to organize a tech company, there is a great danger in one are when it comes to these separate operating “silos”: the planning of new products.

I have a particularly strong opinion on this topic, with an extensive product marketing background and also having worked as a product developer earlier in my career (albeit in a non-tech business).

With respect to current products, the silo approach isn’t much of an issue. The day-to-day activities of the marketing and engineering departments are very different, and can be managed separately quite successfully.

It’s in the future product area that things can get messy. Product Marketing and Product Development both have a key role to play here, if the company is to optimize the process of planning, developing and introducing the best new product possible. The problems is that at every level, from the VP-level down to the engineering project managers and marketing product managers, the product marketing and engineering functions are often staffed by individuals with very different world outlooks when compared to their direct counterparts in the other department.

Inevitably, if care isn’t taken, these very different personality types can lead to some pretty intense conflicts. I’ve been a soldier, captain and general in this war–and let me tell you, it isn’t pretty. The battlefield often is a company’s strategic plan, which ends up in a trampled mess. I have seen this battle play out regularly in the companies that I have worked for as an employee, as well as at many of my clients in eight years as a consultant at PJM Consulting. It sometimes gets so ugly it paralyzes a company, putting it at a severe disadvantage vs. competitors who have less of a conflict.

THE “WRONG” WAYS TO HANDLE THIS POTENTIAL PROBLEM

Unfortunately, most CEOs that I meet are not all that in tune to how damaging these conflicts can become.

Often they will ignore or deny the problem, thinking it is a responsibility to be handled at the VP level.

Another strategy that I have seen companies put in place is to extract the product planning function from the marketing department, and put it under engineering. This will often greatly reduce or eliminate the conflict, but it akin to throwing the baby out with the bathwater. As I said earlier, both marketing and engineering have a key role to play in product planning. This strategy effectively removes the voice of the customer, which is a key role that the marketing department should be playing in any successful software or tech company. As much as product developers think it looks easy, they almost never have the mentality or experience to accurately read markets or customers. Almost no one is great at everything; monitoring and reading markets, and technical product development, are two very different skill sets. Having both mentalities involved in a positive way leads to far better products in the end.

Finally, if they happen to have come from one side of the battle or the other, CEOs sometimes “take sides” in the battle–predetermining the winner. The problem is there is never any real winner in this battle–and the only certain loser is the company and its shareholders.

A CEO can choose to let Marketing have the upper hand–and this may work out adequately in commodity products where there is very little engineering differentiation. In any other circumstance, results will likely be sub-optimal.

Or he can let Engineering win and dominate the planning process–which is a very common occurrence in early stage, technically-driven software and tech companies. But this generally only works well for products made by engineers, built for engineers (the early days of Hewlett Packard are an example of this strategy working successfully). For every company that has used this approach successfully, there are probably hundreds or even thousands that failed in large part because of it.

Ultimately, to make sure that this conflict and its dire consequences are to be avoided, there is one key thing that needs to happen:

IT IS THE CEO’S RESPONSIBILITY TO PREVENT, RECOGNIZE AND FIX THIS PROBLEM.

So what steps can a software or tech CEO take to be on the lookout for this problem–and more importantly, what can they do to prevent it from developing?

*It’s all about relationships: closely monitor the personal relationship between VP-Marketing and VP-Engineering
*Make sure that the VPs are monitoring the relationships below them
*Make sure they are both VPs are open and honest with you about the relationship between departments
*Plan activities which allow engineering and marketing counterparts to get to know each other as “people” outside of their project activities
*Be careful that you don’t inadvertently make decisions or set up policies that reward or tolerate politics
*Design goals and MBOs to reward the two departments for working together
*Don’t ever allow one department to “get ahead” by blaming the other–tie them together as much as possible
*Hire marketing personnel that can talk the language of engineers
*Screen product development hires who will interact with Marketing for the not uncommon attitude that engineers are “superior” human beings
*Encourage the marketing department to get product developers in front of customers
*Watch out for arrogance when screening potential new hires for either department that will interface with the other –arrogance is usually the trigger which starts the battle rolling

SUMMARY

Marketing/Engineering conflict over the product planning process is a common problem that is often overlooked by tech company CEOs. A certain amount of creative tension can exist between the two departments, and be totally healthy. All too often, though, this tension turns into a bloody fight which is destructive to the company’s prospects. It is not “fait accompli”, however. It can be minimized and even prevented by a watchful and proactive CEO.

That’s my take on a common issue which is rarely discussed out loud. Have you had your own issues in this area? Post a comment to add to our discussion.

Phil Morettini
PJM Consulting
www.pjmconsult.com

No Comments by admin on July 8, 2008
filed in General Management, Marcom, Operations, Product Marketing/Management, Software/Product Development, hardware
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High Tech Market Research for New Products

One of the biggest problems in High Tech businesses is the “technology-driven” approach that tends to predominate, especially among startups. Much of this occurs due to the fact the many founders of software and technology companies tend to come from an engineering, programming or other technical background. While a strength in creating a flow of technical innovation, this can be a real problem when companies are planning new products which they hope to find a real market for.

Everyone has a tendency to focus on what they know best; that’s just human nature. Folks spend more time on the issues that they enjoy, are more comfortable with, and are more confident about their ability to make good decisions on. Things that don’t fit into this category tend to be put off, or given short shrift.

The result is often products are well thought out from a technical viewpoint–but much less well so from a “meeting market needs” perspective. While both are important, the market perspective is absolutely critical initially. So what’s the right approach to product planning-oriented market research?

When Should The Research Should Be Conducted?
The answer to this is early, often and forever. The earlier you start prior to design or coding, the more time you will have to obtain the most accurate picture of the market that’s possible. Sometimes there are practical limitations to how early you can start–Trade secrets and patent filings, for example, or the lack of a prototype which may be considered crucial to receiving realistic market feedback. Within these limitations, get out and begin interacting with the marketplace as soon as practical. And don’t ever stop. Markets, especially the software and technology variety, are like living organisms. They are constantly growing and changing. What may be true in the early phases of a market could change dramatically over even a short period of time. Companies tend to develop an internal “common sense” that is used in making decisions, which is based upon past inputs. When doing Product Planning this can very dangerous in a dynamic market.

Who Should Do The Research?
The best way to do this research is what I often refer to as the “two-headed monster” approach: one marketing person, and one technical person. Not a lone wolf if you can help it, and please–no committees. Most often, this would be a Product (Marketing) Manager along with the Engineering Project Manager who will lead the actual development of the project. In the smallest startups, it might be the technical founder and the “business” founder, for example the CEO and CTO, or CEO and VP Marketing. The Business/Marketing manager should be in the lead for this task, but it’s important to note that both camps have a role to play in this endeavor. There are two different perspectives on market feedback, and well as two different priorities in questions to ask. Having both parties involved (assuming there isn’t a dysfunctional relationship) usually leads to the most complete and risk-reducing result. In addition, it often eliminates arguments over priorities later in the process after coding starts (and schedules inevitably begin to slip) If only one can be available, it should be the Marketing side–working closely with the Product Development/Engineering lead to make sure their input is included in the process.

How Should The Research Be Conducted?
This is a really broad question which of course depends heavily on the situation. How much do you have available to you in terms of money and other resources? If you’re in a big company, you may be able to commission some objective research. If you are a startup with modest resources, it usually is an ad hoc exercise of visiting and interviewing potential customers.

What’s most important to keep and open mind, and eliminate your own biases and pre-conceived notions. This exercise needs to be a search for the truth, not an attempt to validate your own theories. Also, make sure that you are talking to the right people. If you are planning a market-creating breakthrough product, you really need to be talking to Early Adopter types, not the guy or gal that only buys after everyone else they know. If you are introducing a product that is very similar to other products in an already large market–but maybe at a lower cost–by all means, talk to those mainstream buyers and even the late adopters. Use the current market phase to guide who to get input from.

It’s great if you have the money to do some formal secondary research, but be careful about confusing formality with accuracy. For example, I know of large companies that spend huge amounts of money on Focus groups, while their Product Managers only reluctantly talk to actual potential customers directly. I find this very dangerous (you might say stupid!). Particularly with breakthrough technology, you tend to find a “garbage in, garbage out” phenomena with professionally managed focus groups. But there is that formal, professional looking report that appears very convincing in the aftermath. They can be great if constructed properly, but I have seen a lot of money spent for a very bad result. If the focus group wasn’t run properly, or the technology is very revolutionary, the results can be total garbage covered in a beautiful wrapper. I always advise that there is a good amount of old-fashion ad hoc research–talking directly to customers–to be used as a sanity check, if not the main research technique. There are exceptions, of course. If you are doing incremental product research, where the product is well-understood and the changes are evolutionary, objective research methods such as surveys may be a great way to get a quick and definitive read on the market’s reaction.

How Do You Know When You’re “Done”?
This really depends on what you are doing, but my general answer is that “you will know when you are done when you get there”. It’s important to not put an absolute time limit on the research, if it is at all practical. In some cases in the real world, this isn’t possible, of course. Sometimes you just have to go with the information that you have gathered up to a set point in time, along with your market common sense, intuition, and gut feel. With incremental product releases, waiting may not be possible or necessary. But if you can avoid it, especially if starting a new company, division, or business area, resist the temptation to “go with what you have”, if it just doesn’t’ feel right. In my experience, when you’ve “done enough” research to begin serious product planning–it’s obvious. You will feel very comfortable with regards to the clarity of the current market snapshoot, and feel you’ve really nailed the wants and needs of the market as it relates to the new product opportunity. Try not to get “antsy” and move forward because you’ve reached the original market research end date on your theoretical timetable. Resist that temptation and keep working until you are CONFIDENT that you are there, unless other factors just won’t allow it.

Summary And Conclusions
Make sure that you do sufficient market research before you begin building products; product development on a developer’s gut feel is most often a prescription for failure. There are a few high profile companies which have entered our folklore that were lucky enough to start that way, but usually this approach will quickly empty your pockets, rather than make you rich.
Include both Marketers and Technologists in the Research if at all possible. In summary:

*Marketing should take the lead on market research for new products
*Always make sure you talk to at least some customers directly and informally
*By wary of formal market research results, if not supported by an informal research “sanity check”
*Make market research a continuous company function
*Don’t stop an individual product-oriented market research project until y
ou are comfortable that you’ve got the correct answer.

There you have my thoughts on market research for product planning purposes. I’d love to hear yours as well.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

1 Comment by admin on March 10, 2008
filed in B2C, Pricing, Product Marketing/Management, Social media, Software/Product Development, market research
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Which Online Advertising Platforms Should You Include in Your Marketing Mix?

I often write about online marketing, as many of my regular readers know. A frequent topic of mine is Pay-Per-Click (PPC) advertising, also known as Cost-Per-Click (CPC). Occasionally, people will refer to this marketing vehicle as Search Engine Advertising. What you’re hearing this called more and more is “Google Adwords”.

HAS GOOGLE ADWORDS “BECOME” ONLINE ADVERTISING?

Of course, its kind of like asking for a “Coke” when you want a soft drink, or “Scotch Tape” when you are seeking sticky-backed tape. It’s the age old story of a brand DEFINING the category itself, and usually happens when a product becomes dominant in a market segment.

The conventional wisdom these days is that Google has basically won the Online Search Engine-based advertising wars, so don’t even bother with any of the other advertising platforms out there. This topic is the very reason for Microsoft’s recent offer to buy Yahoo for a gazillion dollars; they are motivated to do this because Google is so far ahead that they don’t appear able to catch up on their own. This raises the issue of two also-rans in a market, combining to take on the market leader–which usually ends in disaster–but we’ll leave that for another discussion…

Back to the main question, should you focus your online advertising energy and budget strictly on Google Adwords, or broaden your campaign to other platforms? I have an opinion, of course, and I’d like to illustrate that opinion with my own pragmatic advertising experience, as well as some more theoretical marketing theory which has served me well across a variety of markets. Let’s start with the theory, using an experience from my past to illustrate my viewpoint.

MARKET NICHES: HIT’EM WHERE THEY AIN’T

As markets develop, conventional wisdom usually instructs you to “get on the bandwagon” of the market leader, and don’t waste your time “where the action isn’t”. Back in the 90s when I was running a systems & network management software business, Novell Netware had the overwhelming share of the Network Operating Systems business–roughly a 70% share. As a result, most of the companies in our general space focused on making their add-on products compatible with the Novell platform. They ignored two other competitors: Microsoft LAN Manager and Banyan VINES. There were almost no add-on systems management products available for these two platforms. We ported our applications to these two platforms, with excellent payback. Not only were we able to make easy sales to the customers of these two NOS vendors due to lack of competition, these secondary platform vendors supported our efforts to a much greater degree than Novell, where we were one of many. In addition, it turned out that while Banyan (and too a lesser extent LAN Manager) had much higher market shares in the coveted Fortune 1000 market than they did the market as a whole. Many large companies also had mixed networks containing two or more of these NOS platforms–we had a major strategic advantage in these large accounts, due to our cross platform support. The first lesson here is that sometimes it really pays to segment a market a bit differently. In some cases, in segments important to you, the market leader isn’t nearly as dominant as overall market share data would lead you to believe. The second take-away is that smaller market segments are often DRAMATICALLY less competitive, allowing you to efficiently grow revenue without huge marketing outlays to “get above the noise”.

MY OWN EXPERIENCE WITH THE MAJOR ONLINE ADVERTISING PLATFORMS

I run PPC advertising campaigns for several of my clients. Let me make something clear right away–there is no comparison between these three advertising platforms. Google Adwords is the clear winner, hands down. It’s not close. Adwords is both by far the most robust and easiest to use, which is quite a statement. Adwords is a great piece of software, which Google is constantly evolving and improving. You can do almost everything you want and there is excellent online help if you do have a question. If you ever really do need a live person, help is available, even if you are spending a modest amount on advertising with Google. It is a pleasure to work in Adwords. Plus the fact is that by far the most volume of searches is available on this platform.

Yahoo Search Marketing (formerly Overture) comes in second place. This is the original search advertising platform. It’s not nearly as robust as Adwords, but the recent major upgrade at least brought the software into the modern ages–it was pretty stagnant for a very long time, allowing Google to surge into a commanding lead. The basics are covered, and it’s pretty intuitive–although if you are used to working in Adwords, the subtle differences can drive you a bit crazy. And there are a few things that are simple to do online in Adwords, that you have to call and request over the phone to make happen in Yahoo’s platform–but at least they are very nice about it.

And then there is Microsoft AdCenter. What can I say about Microsoft; it is the typically excruciating experience dealing with them. They dominate most markets they are in, and have that arrogant way of dealing with you that only a monopolist has. When you have 90% of the OS or word processing market, you can get away with lousy support, vendor-centric policies and non-intuitive software. But they are a distant third in this market, and they aren’t gaining on anyone. So these weaknesses stick out like a sore thumb. This is the newest platform. The software isn’t all that hard to use, but in Microsoft fashion they have created some of their own conventions in opposition to market terminology, and the application doesn’t always behave in a way you would expect. Add in the unbelievable support mentality, not to mention the fact that they are a distant 3rd in traffic, and you realize why they are last among the major platforms. As an example of their attitude, when I decided to look at Microsoft’s offering, I wanted to import my Adwords campaigns into Adcenter to save a BUNCH of time, which the Help function stated that I could do. Makes a lot of sense for a new user, right? Well, I couldn’t figure out how to do it in the software, so I called Adcenter support to ask how. I was told that I needed to be spending at least $11,000/month to have access to that feature! There’s a classic catch 20–not allowed to import all your campaigns into a platform (which will enable you to spend money in that platform), until you’re spending over $100,000/year. Brilliant market penetration strategy! Whoever is making decisions at Microsoft has no idea how to compete–which I guess isn’t surprising for a monopolist. No wonder they are trying to buy Yahoo….

SUMMARY AND RECOMMENDATIONS

Adwords is clearly the best platform, so why bother with the other two? Remember the discussion about niche markets above. Although Adwords is by far the best, as a result, it’s also the most fiercely competitive of the three–meaning costs are high and margins are sometimes lower. It really varies by market segment, but in some segments, Yahoo Search Marketing and Microsoft Adcenter are neglected, leaving excellent bargains on important keywords. I am currently running a campaign on Adcenter for a client in a very niche, technical market, which isn’t supposed to be well suited for MSN search traffic. This campaign is doing VERY well. So the moral of this story is don’t pick one–use all three, as long as you’re making money on each of them. This is the beauty of PPC marketing, after all. It is quite easy to test to see if it will work for you, and objectively track your results.

That’s my take on the three major search marketing platforms–I’d love to hear yours. Post a comment so everyone can benefit from your own experience.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

1 Comment by admin on February 12, 2008
filed in B2C, Marcom, Online Marketing, Product Marketing/Management, Promotion, enterprise software, sales
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Channel Pricing Strategy for Software and Hardware Products

Pricing software products is always a difficult exercise. With high product development costs, but near zero costs of goods sold, there are many different strategies that people have followed successfully (and not so successfully!) over time. Pricing hardware products is a bit simpler because there is generally a significant cost of goods sold that acts as a governor on pricing behavior. But even with hardware, technology markets are dynamic and fast moving. And it’s a complex enough topic when all sales are going direct–once you bring channels into the picture, it only gets worse.

CHANNEL CONFLICT
The biggest concern most companies have when pricing for multiple channels is channel conflict. I have seen many companies who actually AVOID selling through channels for fear of the pricing implications it brings. They are afraid of a channel undercutting their direct sales force in price, and channel conflict in general, which arises as a result of different prices being presented to customers from representatives of different channels. But this doesn’t have to be so; with a savvy understanding of the implications of pricing actions. This comes from both experience, and “paying attention to what actually HAPPENS in the marketplace. If you price properly and run your channel programs well, you can sell successfully via multiple channels–with these channels living in relative harmony.

VALUE-BASE CHANNEL PRICING
I’ve written about value-based pricing before, in the context of the perceived value of a product, as seen by the end-user, being the guidepost for pricing actions. A similar concept exists for channel discounts. Rather than taking a simplistic approach and give the greatest discount to the channel players that move the most product ( a destructive strategy–more on that later), it’s important to measure how much “value” a particular channel provides both you and your end-user customers. Look at things like 24/7 support, inventory & product availability, technical expertise, credit services, and the like. In this case, it is helpful to let the cost of delivery of each of these attributes be your guide to the value they provide.

VALUE-BASED CHANNEL DISCOUNT STRUCTURE
For example, you may figure that the cost of a VAR providing 24/7 support to end users (meaning YOUR company doesn’t have to) is equal to 5% of the list price of the product. And the inventory held by a retailer (again, meaning YOUR company doesn’t have to hold it, at a cost) is equal to 2% of the list price. And so on and so forth. Using this value-based method, you can calculate the actual costs borne by your partners in delivering marketplace value, and use this as a guidepost in building your channel discount schedules for various types of channel partners. This value-based channel pricing approach is not well-known, and seldom considered; most people seem to figure the only value worth extra discount is sales volume. If you use a value pricing approach, you actually have a chance to build a multi-channel strategy that “clicks on all cylinders” by providing discount structures that are equitable based upon cost and value associated with each channel.

LIMIT VOLUME DISCOUNTS
If you choose the “more volume=greater discount approach, your multi-channel strategy is a house of cards which will soon collapse around you. One channel will quickly grow to dominate, and the other channel types will soon quit selling on your behalf, and wither away.

THE GOAL IS TO MAXIMIZE SALES THROUGH ALL CHANNELS
Again, the key is to not let one channel dominate. Ideally, you would like all channels to be presenting prices to the end customer that are equal. In reality, that pretty much can’t happen without price fixing (which some folks may be able to get away with, but that’s another story….). But you should strive as much as possible to have end user pricing equity for all channels. But this is where the counter-intuitive part of this discussion comes in to play. Most people pricing high tech products have a tendency to price based upon the volume of product a particular channel player can move. It seems logical–why wouldn’t you want to incent and reward a partner with better margins if they are selling more products?

While this appears logical, it is actually penny-wise and pound-foolish. In fact, it is usually catastrophic to your plans to maximize sales through multiple channels. Let’s look at a simple case of how this often “breaks” a multi-channel strategy for a common case: a vendor selling through both retailers and VARs.

A SIMPLE EXAMPLE
Retailers provide a vendor with a point of purchase holding inventory, where their customers can go to immediately purchase a product. VARs often don’t hold inventory, but provide other services important to the vendor and some customers, such as tech support, training and integration with other software and hardware products. Each may have an important role to play in the overall strategy to maximize vendor sales.

But the retailer will usually be a high volume partner, with the VAR less likely to be a volume outlet (although the VAR CHANNEL, in total, may hold great promise to move volume). If you structure your pricing by volume, the retailer will get better discounts. Because individual VARs generally have higher costs spread over lower product volumes, they actually need HIGHER discounts to stay even in pricing potential to the Retailer. This situation is exacerbated by the fact that retailers tend to be volume-oriented, usually accepting a relatively small, fixed margin on everything they sell. If you provide discounts based upon the volume that a partner moves, what will happen is inevitable: The retailer will take over your channel business, because the VARs will be “squeezed out” by the relatively low prices charged by the retailer. They won’t be able to make a profit on your products, so they will ignore the business, and you will lose the opportunity to realize significant sales through the large (in aggregate) VAR channel, especially those customers that desire the service and support they supply. I am oversimplifying this situation, of course, because VARs are more interested in the service revenue that a product can pull, than they are in product margins. But I have seen this scenario play out many times and kill product sales through VARs channel that might otherwise generate health sales through that channel. This can be a heavy penalty for naïve technology product managers who are charged with pricing their products and moving them through multiple channels, but who don’t fully realize the consequences of their actions.

SUMMARY
Pricing seems pretty simple on the surface–when channels are involved, it’s anything but. It’s important to fully think through the downstream effects of your pricing policies when multiple distribution channel are involved. Let me know if you have questions, or you own channel pricing stories that you’d like to share.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

No Comments by admin on November 23, 2007
filed in B2C, Corporate Strategy, Distribution Channels, Pricing, Product Marketing/Management, enterprise software, hardware
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Forecasting New Technology Products

Forecasting is a thankless job. It’s a lot like being a referee or umpire in your favorite sport; the only time a game official is noticed is when they do something wrong! Similarly, a forecaster’s primary aim is too stay out of the “news”.

Make no mistake; forecasting is a very important function in any business. In the software business, your whole business plan could be riding on meeting the forecast to fund growth and product development. In a hardware business, it’s even worse–you have to worry about creating too much or too little inventory–either of which can be a huge problem for your business.

HARD IN THE BEST OF CIRCUMSTANCES

It’s bad enough when you are trying to forecast an existing, mature product, in a mature industry. This is a difficult and complex task, using well known techniques such as smoothing, trending and seasonality to fine tune the next month or annual forecast.

Early in my career, at Hewlett Packard, I spend 4 months in a special assignment dedicated solely to improving forecast accuracy. The marketing department was engaged in an ongoing argument with manufacturing over inventory levels. Not surprisingly, manufacturing wanted the inventory levels to be lean, while marketing favored a more robust number. This was because manufacturing was being graded on their costs and at that time “owned” the inventory; while Marketing was graded on revenue–and low inventory levels usually lead to missed sales opportunities.

I became a Lotus spreadsheet guru, and we used everything we could find to try to improve our forecast accuracy. Keep in mind that these were high tech products (computer printers), but successful product lines with significant historical data available. Try as we might, the best we could ever do was to get within 25% of the eventual unit sales number.

NEW TECHNOLOGY PRODUCT ARE THE WORST POSSIBLE SCENARIO FOR FORECASTERS

The main message here is that forecasting in any product in high tech industries is almost impossible, from an accuracy perspective. Forecasting accurately the performance of NEW PRODUCTS in technology markets is TRULY impossible to do accurately. With brutal competition, a tight market research budget, vague notions of market size, an early stage on the user acceptance curve, and often the reality of an unknown brand, forecasters of new technology products needs to make sure they don’t end up in substance abuse clinics. But of course, even though it’s hard– it’s still VERY important. So what’s a forecaster to do?

There are two basic methodologies that I typically utilize when attempting to forecast sales for a new technology product:

TOP DOWN FORECASTING METHOD

The first approach that I usually engage is what I like to call the “top down” method. You might also call this the “Macro” approach. This is an exercise of defining the size of your total addressable market using market research or number of potential users, and also estimating what a reasonable share will be for your product, given the various attributes of your market position. Consider everything you can in your analysis: your marketing budget, brand strength, an unbiased view of how your product stacks up vs. the competition, etc. It may be helpful to put it all in a spreadsheet, and quantify the various important attributes of your company/product vs. your competition. Be careful about assigning too much precision to these numbers; remember that garbage in equals’ garbage out. But if you go through this exercise thoughtfully, it can be very helpful in analyzing your relative market position. In this case, obtaining your top down forecast is then as easy as multiplying the share you think you can obtain, times the market size that you came up via research.

BOTTOM UP FORECASTING METHOD

After I’ve done the top down or Macro forecast, I like to use what I call a bottoms up or “Micro” approach as a sanity check. To do this, you want to gather information on what you think you can sell from individual stakeholders in the sales area: direct field sales reps, Online/Web store, dealers, international distributors, etc. It’s helpful to gather info from any channel that will be a significant contributor to sales for this new product. Usually it’s impractical to do a complete survey of everyone that may be involved in the sales effort. What’s important is to obtain a representative sample that is both broad enough and deep enough that the data you gather has some significance. At that point, you can “normalize” the data. For example, say you were able to gather data from a broad cross-section of sales points, totaling approximately 10% of the total sales infrastructure. You would then multiply the total number of units/dollars you obtained from your sales entities times 10, to reach a bottoms up forecast totaling 100%.

DO YOU HAVE CONVERGENCE?

The key to this exercise is to discover whether your two views of the market are close enough that they appear to be focusing on the same topic! If they do, you may be in pretty good shape with your forecast. If they are off by an order of magnitude, it’s probably time to reconsider some of your assumptions.

SUMMARY

So there’s my advice on how to approach the unenviable task of forecasting a brand new technology product. It’s a high risk, high return activity under the best of circumstances–and ideal conditions are seldom found in this activity in the technology space. But if you are able to construct both a top down and a bottoms up forecast, and the two numbers at least fall in the same ballpark, you’re probably on the right track.

Give it a shot yourself next time you’re faced with this forecasting daunting task. Feel free to shoot me an email with your questions, or leave a comment for discussion.

Phil Morettini
PJM Consulting
www.pjmconsult.com

4 Comments by admin on October 17, 2007
filed in Pricing, Product Marketing/Management, market research
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Business Models in the SMB Market

The SMB market is typically a very popular topic for hardware and software companies. Every one wants to sell to the Enterprise market; as a result, competition is fierce and standards are very high. If you get to the Enterprise market early, with an innovation that creates a new category, you can find success if you are truly making a contribution to the market. But late entries into a market segment, as well as early stage companies competing with larger, established companies, often have a very tough go of it. In these situations, attention often turns to the Small and Medium-Size Business, or SMB, market.

And why not? At first blush, the SMB market appears to be huge, as well as underserved. It looks like a perfect haven for an early stage or turnaround company with a solid product, but not quite enough differentiation, brand name, or marketing muscle to push out the big boys in the Enterprise space. So the decision is made to focus on SMBs.

What’s Wrong With This Decision?

There is nothing wrong with this decision, per se–if it’s done with eyes open, for the right reasons. But too often, it is done to run away from a problem (the inability to penetrate enterprises), rather than run to a great opportunity. A lot of times, companies see the SMB market as easier turf; simply a larger, less competitive market than the Enterprise market. Major problems can result from this type of mentality, and I see it quite often in my consulting practice. Companies that enter the SMB market from this perspective usually aren’t fully prepared to do what it takes to be successful, in what is a very different type of market than they may be familiar with. So where are the land mines in the SMB marketplace?

What’s Not Obvious in Marketing to SMBs

The first thing to consider is that customer needs are often quite different. A lot of this depends upon what technology and market segment you are in, and whether your product is aimed more at the “S” (small) segment, or the “M” (medium) segment of the SMB space. For example, if you are selling a single user productivity tool which is useful staff accountants, you may not see much difference. If on the other hand you are marketing a company wide, networked application of some complexity, the differences may be huge. Like everything in technology marketing–the devil’s in the details. Every situation needs to be evaluated closely, and treated differently on its individual merits. The most important thing is TO NOT ASSUME THAT THINGS ARE THE SAME BETWEEN SMBs AND ENTERPRISES IN YOUR CATEGORY. Do the work, evaluate the situation–don’t assume. Assumptions, without verification, are what get you burned in this transition. Below is a list of some of the major differences in the SMB market:

IT Departments are small and less of a factor–if they exist at all.–In Enterprises you may be dealing with persnickety CIOs that want thing just so. In SMBs, if there is a CIO at all, he will be looking for an off the shelf SOLUTION that will “just get the job done”. Or you may end up struggling to figure out how you can sell your complex solution, to a company that has NO IT DEPARTMENT AT ALL.

There is less money to spend–It’s harder to make money with big ticket hardware and software, let alone customization and expensive services. Your products better have value – and margin – right out of the box.

Ease-of-use is even more critical–There probably is no training department or other corporate staff, and people are busier overall. If they can’t figure out how to use it quickly, you’re going to have a hard time selling it.

There is much less time available to purchase products–Even the sales process may be compressed, in terms of how much time the prospect spends reviewing your marketing literature, or talking to your sales people. The actual TIME ELAPSED during the sales cycle could be EVEN LONGER due to lack of time available to the prospect, but the INTENSITY of the purchasing engagement is often much less.

How Do You Need To Structure Your Business Model Differently?

Lower prices– They just can’t, and won’t pay the same prices that you can get in the Enterprise space, in most cases. So you’d better come into this segment with a price and value proposition that makes sense to these price-sensitive customers.

Marketing vs. sales–The SMB market is more marketing intensive, with respect to marketing/sales ratios, than the Enterprise market. There are many more customers; the average sale amount is much lower, and much less face time available for direct sales. While in many respects Enterprises are the most demanding customers in the world, you’ve got to be a better marketer to succeed in the SMB space than you need to in the Enterprise world.

Low cost sales force– With much lower average sales amounts, and much less time available on the customer side, it is usually impractical to have a large, high-cost field sales force. Inside sales forces are the general rule in this market. If you have a product that demands customization and hands-on support, VARs are a good adjunct to consider. The more they are taking orders generated from marketing, and the less they are cold calling prospects, the better.

Better usability and reliability– You’ll need many more units being sold to get to the same level of Enterprise revenue, across a much larger customer base, with much less (if any) maintenance revenue to fund a large support staff. Your product better work when it’s installed and better be very easy to use over time. Unless you have a highly customizable solution and are using VARs as a channel, SaaS is a great platform for delivering software to this market.

Little or No IT support–The good news is that there is no prickly IT committee or staff that you have to “go through” to sell to the real users. The bad news is that if even the littlest thing goes wrong, there’s no one internally at the customer to pick up the slack–you’re going to hear about it directly from the user–over an over again.

Summary

The SMB market is actually a simplistic catch-all phrase for a large, heterogeneous group of markets. But it is a useful abstraction, as a starting point for understanding how to penetrate and thrive in B2B marketing to smaller companies. I hope this short introduction is useful–feel free to pitch in and post a comment adding to this topic.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

1 Comment by admin on June 10, 2007
filed in Business Models, Corporate Strategy, Distribution Channels, Pricing, Product Marketing/Management, Software/Product Development, Startup/Early Stage, VARs, sales
tagged , , , , , , , , , , ,

Marketing and Selling Technology Products through the Value-Added Reseller (VAR) Channel

Selling through multiple channels is one of my preferred strategies in technology marketing. If done properly, it allows a company to fully exploit its expensive, hard-earned intellectual property to the maximum extent. One of the most popular channels (and one of my favorites) used to sell B2B software and hardware is the Value-added Reseller, or VAR channel.

VARS ARE THE DISTRIBUTION HOLY GRAIL FOR MANY STARTUP COMPANIES

In fact, with a great many startup software and technology companies, building a VAR channel network to sell their companies products is the first thing they want to do, upon releasing their first product. This is especially true when the founding management team primarily comes from a technical background. The thinking goes; they are technologists who have created a great product. They don’t have a lot of experience selling or marketing–and most of the startup money has gone to, and will continue to go to developing products. Why not just recruit a bunch of resellers to market and sell their product for them? Sounds like a great idea on the surface, doesn’t it?

Unfortunately, there are few strategies that are more flawed, and which have continuously led to failure than this one.

Let’s contrast the realities of the VAR channel, against this simplistic notion that has been tried again and again, without success:

WHAT VARS DON’T DO

1) First of all, VARs DON’T market. At least not YOUR products, anyway (they may market their services). So the very first flaw in this strategy is that it is based on a gross misconception of what a VAR typically does.

2) VARs don’t create new markets. VARs are great at selling into established markets and further expanding already growing ones. Missionary sales: brand new markets, categories and products? Not so much.

3) They don’t sell a wide variety, or a large assortment of products. In fact, VARs are focused on actively selling VERY FEW products–if they are even focused on selling products at all.

4) VARs aren’t motivated by high product margins.

5) The individual VAR does not exist to help YOUR company make money.

Now if you’re not a sales or marketing professional with experience working with the VAR channel, you’re probably very confused by the list just above. So what is it that VARs actually do? And why is it worth dealing with them at all!

What happens time and time again is that a technologist startup CEO will pursue the VAR channel as their exclusive distribution channel, without knowing any of the points in the list above. Their effort will fail miserably, and they will then scramble to begin selling their product directly, or through some other means. They will swear off the VAR channel forever, and I do mean swear:

“Those !!@#$%^^* resellers are good for nothing. They take a big cut of your margins, while adding no value in return. I’ll never deal with them again.”

I can’t tell you how many times I’ve heard some version of the quote above.

But the VAR channel is a major force in the technology business, and if you know what you’re doing, it can be used to great leverage by your company. So let’s now take a more realistic look at what VARs CAN DO:

WHAT VARS ACTUALLY DO

1) First and foremost, VARs are in business to sell their own HIGH MARGIN SERVICES. That is why they exist, and how they put bread on the table. This revelation may be discouraging to some product vendors, but you must understand and respect this above all, if you hope to leverage this channel. The only exception to this is the “core” product, which will be discussed later in this article.

2) VARs are very interested in things that apply to their own vertical focus. Although it wasn’t so true many years ago, most successful VARs these days have a very tight vertical focus.

3) Many VARs act as “thought leaders” for their corporate customers. So they are very interested in “what’s new” in the market, so they can stay on top of trends and remain market experts for their clients. This means that they will sometimes spend a lot of time talking to you about your new product, but never find the time to actually “sell” it (even if they have the best of intentions). In the busy world of the small VAR, client demands and selling the core product and services usually soak up all excess time.

4) VARs are often used as “aggregators” of purchases by corporate clients. This way, the corporation can use a single vendor point of contact for their technology purchases, greatly simplifying their purchasing process. They can also leverage the VAR as an evaluator/validator of new products and technologies. This makes them a very important part of the purchasing chain for many corporations.

5) If they put any real effort into selling products at all, it is usually into one or two “core” products that they have built their service offerings around. If you aren’t a product that pulls services, forget about getting high mindshare with the VAR.

6) When it comes to selling “non-core” products, VARs are almost completely driven by the demand they see in their installed customer base. They won’t often add in new products that they don’t see a demand for, unless they are really techie, early adopter types. And these techies will often add a product, but never find time to actually offer it (let alone sell it) to their customers.

7) The VAR channel is EXCELLENT at fulfilling demand for great new products into their existing, installed customer base.

8) VARs can be an excellent proxy for a vendor in installing, configuring and offering first level support. This can enable a vendor extend its reach and to leverage the VAR channels existing infrastructure rather than building out a large field organization (which depending on the product category, may not even be feasible).

So given the points outlined above, what are the “best practices” to follow when you are seeking to build and leverage a VAR channel?

VAR CHANNEL BEST PRACTICES

*Always sell your new product directly in the beginning. Even if you don’t plan to build a direct sales force and sell directly in the long run, it is critical to establish that the product works, and can be sold successfully. If you can’t sell your own product, no VAR will be able to either (and few smart ones will be willing to try). De-bug and systemize the sales process, make sure that your end user price points are right, and build a small reference account list–at a minimum. Only at this point should you begin to approach VARs to distribute your product.

*Marketing the product is the vendor’s responsibility. Do not naively think that the VAR will market the product for you, or that since you have VARs to sell, you don’t need to market at all. Remember, VARs are great at fulfilling demand among their existing customers–and very poor at creating it among new customers. The vendor must position its products in the market and create demand for them–otherwise your channel efforts will certainly fail

*Treat VARs like the valued business partners they should be. If you do sell direct, don’t “steal a deal” and take it direct just to make a few more points on one sale. Nothing is more short-sighted. Not only will this VAR not do business with you again, in any given vertical it’s a small community–and word gets around fast. You risk becoming a pariah in the VAR channel, and losing all the hard work that you put into building your network. My philosophy is: when in doubt, cut the VAR in on the deal. If you don’t feel he’s adding any value to your business, eliminate him from your network after the deal. But don’t use your low opinion of a particular VAR to convince yourself to cut him out of the deal. You risk cutting off your own nose in spite.

*Be realistic in what the VAR channel can do for you.
If you have a non-core offering, be happy that they “make it available” to their customer base, rather than expecting them to sell it actively. Remember, VARs are key influencers of their clients; just being available to endorse your product as something they offer, to a customer that hears about the product elsewhere, can be very valuable.

*Provide a reasonable margin, but don’t “throw margin away” thinking that it will motivate a VAR to actively push your product–if they otherwise would not. It won’t work, and you’ll just be giving away money for no reason–that you could use creating demand instead.

*For most products, make sure that you don’t over-distribute by signing up more VARs than your market will support. Even though greater margins might not make a VAR push your products, the erosion of margins to near zero will cause a VAR to eliminate your product from their portfolio. It’s better to leave a few deals on the table, than to risk demotivating your entire reseller network, because they are 6 competitors are bidding on every deal in an particular area. The exception to this is if you represent a “core” product that pulls significant service revenue, you can get away with a lot more stuff, because the product margins are trivial to the VAR compared to the lucrative service revenue. But in this case, be careful when using your market strength to abuse partners. People have long memories, and “what goes around, comes around.”

SUMMARY

That’s my primer on how to approach, and even more importantly, how NOT to approach doing business with Value-Added Resellers. Post a comment or send me an email to delve into this important topic further.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

7 Comments by admin on January 28, 2007
filed in Business Models, Corporate Strategy, Distribution Channels, Product Marketing/Management, Startup/Early Stage, VARs, enterprise software, sales
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Windows Vista – What will it mean for Microsoft?

As everyone who hasn’t been secluded in a cave for the past couple of weeks knows by now, Microsoft recently announced release of its new Windows Vista operating system to its large business clients. I’m sure that the timing of this announcement has been well thought out-and who am I to question it, really?

But on the surface at least, it’s pretty curious.

CURIOUS INTRODUCTION STRATEGY

First of all, they didn’t shipping the consumer versions first, even right before the Holiday shopping season, the period during which the bulk of the annual volume of PRACTICALLY ALL RETAIL PRODUCTS is sold. This is a huge hit to Microsoft’s sales, as well as their retail partners, system manufacturer partners, peripherals manufacturers, etc. Really, its a major hit to the whole Windows eco-system, because Windows upgrades drive upgrades of everything else.

In addition, they DID ship it to their large customers–right as the Holiday Season started. First of all, these large customers are notorious for lagging in terms of Hardware and Software upgrades of any sort. They are large, and everything takes them a while to do. But they also need to test and modify custom internal applications, and with something as fundamental as a major OS upgrade, IT shops really want to wait and make sure most of the bugs and issues are worked out, prior to undertaking massive upgrade conversions. I’ve seen estimates that this customer class won’t start upgrading until the 3RD Quarter of 2007. It seems like a delay of a few weeks wouldn’t make much of a difference.

So what was the hurry? Beats me. Again, on the surface, it seems like a case of misplaced priorities. Sure looks like I would have put every man possible on getting out the consumer versions, and saved the Enterprise versions for later. But I’m sure that there are good reasons that and outsider like me is not privy to, why this wasn’t desirable of possible. I’m guessing that Microsoft would probably say that the consumer versions have more testing/QA required, and it just wasn’t possible to get the consumer versions on the shelf by the Holidays, no matter the resource allocation. They’ve already missed several Holiday Seasons with the extreme delays on Vista, so what’s one more, anyway? So I’ll give them a pass on this one.

WILL MICROSOFT REMAIN DOMINANT?

But the bigger question here, besides the nitpicking about timing, is what will Windows Vista mean to Microsoft in the longer term? Will this launch, much hyped by the company for what seems like forever, be a point of inflection for their fortunes–refreshing their sales momentum, and restoring their dominance? Yes, I realize that the guys in Redmond aren’t exactly on the way to bankruptcy at this point. Microsoft remains a cash machine, enjoying outsized margins, generating enormous profits, and remaining a feared competitor for MOST of the software industry.

But it does seem like the company has slowly lost a bit of its edge the last few years. People in the industry retain a healthy respect for them, but it’s not quite the same. It wasn’t too long ago that VC’s were designing their portfolio’s around NOT competing with Microsoft. If you put a company together that was going to compete with them head-on, you risked being laughed at, and having your spouse nervously requesting that you see a psychiatrist. For quite of while, going out of your way trying to compete with them just WASN’T DONE.

That has all changed.

VISTA HELPS MICROSOFT, BUT WHAT IS WORKING AGAINST ITS CONTINUED DOMINANCE?

1) The OS is still important, but the Internet and Web-based application development has changed the landscape considerably. While the OS is still extremely important, instead of being a POSITIVE competitive weapon that Microsoft controlled to provide advantage for their own applications, it has come to be perceived as a high-cost security problem that has left the company on the DEFENSIVE. The application platform of choice for end user interfaces going forward appears to be the Web, for a lot of reasons that we won’t go into here.
2) Even on the OS server side Microsoft is under attack, with “free” Linux providing a much lower cost solution with greater stability and security–according to many large corporate IT shops.
3) The Web has evened the playing field for the competition. Like most large companies, Microsoft has struggled to keep up with the changing rules of the game. They have been a step or two behind for a while, but have always been able to catch up in important new markets, using the fast follower approach. But with a continuously lessening advantage from their near-monopoly platforms, it’s getting harder for them to come from behind and dominate markets. Google is currently kicking their butts in Search–the most high profile example.
4) The final major threat is the advent of advertising-driven business models, which threaten to put a large dent in the classical paid licensing model that is a huge cash cow for Microsoft. It is always hard for the large, entrenched leader to obsolete their revenue model/streams.

I believe that Microsoft is struggling greatly with these issues.

Finally, the fear of the company just isn’t there anymore. People will still tread carefully in their footsteps, but the company is definitely going to be facing increasing competition by upstarts using novel approaches in the coming years. This will stretch the company that much further, as they are required to respond to competitive threats across a much broader landscape than in the recent past.

HOW GOOD IS WINDOWS VISTA-THE PRODUCT?

What about Windows Vista the product? How good is it? I haven’t gotten my hands on a copy personally, but everything I have read to date leads me to believe that it is a solid–but fairly pedestrian at this point–step forward for the Windows OS. One major IT magazine’s analysis was that the code is solid, and it should prove to be a good platform for improving security in the long run. There is also wide belief that it will help IT shops manage their PC assets more easily and cheaply. But others have stated that everything Vista enables concerning an IT shop could today be implemented by a well-run IT department with Windows XP. This is hardly a ringing endorsement after 5 years, and many slipped intro dates. While it may be fundamentally better for security, Microsoft has a huge problem with the Windows OS, no matter how well they design and code security changes. Any system can only be “hardened” so much. With such widespread use, Windows has a big target on its back from every hacker in the world. Also, as the OS becomes more naturally complex and sophisticated in capability over time, that many more holes open up for people to attempt to exploit. I believe it is ultimately a game Microsoft cannot win.

From a consumer’s perspective, the sexiest new feature is the 3D user interface, which requires a very high end graphics subsystem. But the problem here is that for most people, this is projected to be a $500-700 upgrade. Again, systems and peripherals manufacturers will love it because it pulls hardware sales–but the new hardware requirements should slow adoption by consumers.

Of course, much of the fancier improvements to the Longhorn project had to be dropped as the coding slipped. So I’m sure there are many incremental improvements that will occur in Vista in the coming years. But remember, this was billed by Microsoft as a great leap forward, for many years. It looks at this point like an incremental upgrade–not a revolutionary one.

THE BOTTOM LINE

So what’s the bottom line for Microsoft with its new Windows Vista OS? It’s always very dangerous trying to predict the future in high tech. The law of unintended consequences looms large, and those consequences usually aren’t readily appare
nt until much later. But if I had to project today, I’d say that Vista will provide Microsoft with a nice short and medium term sales boost. But I also believe that it will do nothing to slow down the powerful forces already in motion, that are slowly eroding the Microsoft near-monopoly, and may eventually make it simply a “mortal” company again.

That’s how I see it–post a comment and let us know your view.

Phil Morettini
PJM Consulting
www.pjmconsult.com

3 Comments by admin on December 16, 2006
filed in B2C, Business Models, Corporate Strategy, Product Marketing/Management, Software/Product Development
tagged , , , ,

Flattening of the Growth Curve

In every company’s history there comes a time (or two or three or four times!) when your momentum slows, and the sales curve begins to flatten. This can be one of the most trying and frustrating times for software and technology companies. It’s certainly not as difficult as the startup phase, when “crib death” is an ever present fear. And a no growth, flat revenue scenario is much preferable to declining sales combined with negative profitability that follows, which leads to a “death spiral” if no effective action is taken.

I do find this situation is often more confusing to company management than either the start up or death spiral scenarios. This is because it often occurs just after a period of fast growth and prosperity, where it seems that the company can do no wrong. As a result, senior managers are often in denial about what is happening—whereas in the startup or death spiral situations, the situation is much more obvious, usually motivating folks to take fast, decisive action.

Search for the Culprits, Blame for the Innocent

With flattening growth, it’s easy to blame things that may not be the true cause. I often here excuses and tactics such as the following:

“The marketing department just needs to put out better promotions. Fire the VP Marketing and bring in someone who will get the job done”.

“The sales force isn’t selling hard enough, they just need to close more deals. Get the VP Sales off the golf course and tell him to kick some butt, or he’ll be the next to go”.

“The channel is useless; they’re taking 30% but they aren’t pushing the products—take more deals direct”.

“We just need to charge more for our products; we’re leaving money on the table”.

“Cut the price to stimulate demand.”

“The UK distributor is fat, dumb and happy—sign two more of his competitors to motivate him and maximize sales in that country.”

Now some of these reasons may even be accurate, and some of the proposed tactics could be possibly be useful. But I have found, quite often, that things of this nature aren’t the fundamental issue, and beating up the sales force, cutting or raising prices, or messing with your channel balance may exacerbate the situation and make things worse—not better.

The Real Problem

Sometimes the answer is as simple as “All good things must come to an end.”

Growth cycles don’t last for ever, as much as every software & technology company CEO, VP marketing and VP Sales wishes it would. There is almost a natural cycle that occurs with revenue that often coincides with the life cycle of your products. Also, the economy changes, competition heats up, novel marketing programs age and are copied—which reduces their effectiveness, market segments get saturated, and customer budgets are re-targeted to the “next new thing.” Stuff happens—always. The only real question is when.

So what’s a befuddled and perplexed tech company CEO to do?

Finding a Solution

Well, the first thing I recommend is to really spend some time getting to the bottom of things. Instead of shot-gunning blame that may be misplaced, or impetuously blowing up established pillars of the business—conduct a real, objective analysis of the nature of the slowdown. I don’t suggest paralysis by analysis by any means, but do take the time to gather some data, so that your actions will be based on more than knee-jerk reactions.

Past that, it’s hard to generalize on a course of action, because the proper action will depend upon what you find in your analysis. But for the sake of discussion, let’s say that while there are a few factors that you find which could be leading to slower growth, there isn’t a “silver bullet” reason that can be “fixed” to get the revenue curve again pointed up and to the right. Below are some general steps that I’ve found may enable you to “restart growth”. I might add that many of them are most effective if you begin them prior to actual revenue flattening:

Try marketing programs you haven’t used before
Usually when you get in a period of high growth, there is a workhorse program or two that has worked well for you, and there is a tendency to “keep doing what works”. Unfortunately, even the best conceived marketing programs eventually run out of steam. One of the keys to having consistently good outbound marketing, is too be constantly testing new ideas, placing small bets, and fine-tuning them if there is enough success to continue. As I’ve said before, product marketing is part art, and part science—with the art portion unfortunately upfront. You need to do a little trial and error to find a good program, and then the science kicks in, using data you’ve gathered to optimize it. But the key is to be constantly testing new ideas, in good times and bad. If you wait until your growth has already slowed, you may scramble for quite a while, trying to find a new answer.

Have an internal “growth” brainstorming session
Ideally you are doing this before you fall into a revenue rut. But regardless, do bring together people in your organization to bring out the ideas they may have to give the top line a kick start. Do hold these sessions in an open, non-threatening and non-political environment. It’s important that people are able to speak freely, and not be ridiculed, if they come up with an idea that’s “too far out of the box”. That is often where strategic breakthroughs are made. And don’t just limit these sessions to executive managers. Remember, the people at the bottom of the org chart are often the ones closest to the business, and are sometimes able to more easily spot a big opportunity that the company could capitalize on.

Hire some outside help
Consultants have a very bad name in some areas—unfortunately, sometimes with good reason. But bringing in someone with deep marketing or management expertise, with a different viewpoint than the internal management team, can sometimes be the quickest way to new approaches that will turn the ship quickly. I’d recommend staying away from folks that that have a cookbook formula, have only been consultants and not operating executives, or take too much of an academic approach. Every company, market and point in time is different and needs to be analyzed as such. But hiring the right outside consultant or firm who is creative, analytic and “been there and done that” can have a big impact. PJM Consulting has often worked as a change agent in these situations, and increasing or restarting traction is an area of specialty.

Look at entering an adjacent market
If it’s determined that your current market space is getting saturated, one of the first things to do is to look at adjacent spaces. Preferably, look somewhere that you can leverage your current marketing, distribution and brand, but also possibly where you can apply existing company technology to a different customer’s problem. The key here is don’t go to a complete green field that looks attractive because it’s large or growing fast, but where you have no real possibility of competing. Again, it’s best to be taking this step in anticipation of slowing growth in your current business—rather than waiting until it happens. Getting traction in new areas can take some time.

Consider M&A to fill out your product line or distribution system
If you’ve been caught by a surprise slowdown and you need to do something quickly, a strategic acquisition can sometimes be the answer. I warn you to proceed with caution here. M&A is fraught with danger—statistics show that most acquisitions don’t work out well. You need to think it through, proceed carefully, and don’t get overly excited by the thrill of the deal chase. If done well, however, a strategic acquisition can be a real shortcut to entering an adjacent space, filling out your product line for an existing strong distribution system, or adding sales channels to your strong product offerings. This is another area where PJM Consulting has strong experience, and can offer assistance.

Think it through before you start shooting

There are obviously endless other potential ways to explore when attempting to jump out of a revenue rut. I wanted to suggest a few to stimulate your thinking—and more importantly, steer you away from some “knee-jerk” reactions, that often make your situation even worse.

What have you done in the past when you need to restart growth? Post a comment below and fill us all in on your strategies.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

4 Comments by admin on April 19, 2006
filed in Business Models, Corporate Strategy, Distribution Channels, General Management, Marcom, Mergers & Acquisitions, Product Marketing/Management, Promotion, Software/Product Development, market research
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Software vs. Hardware

Much of my consulting practice centers on working with early stage software companies. But I have substantial hardware market experience in my background, and I do take on consulting assignments with hardware companies.

So what are the differences and similarities between successful software and hardware businesses?

Capital Requirements
One of the larger differences is that software companies generally require much lower capital to reach profitability and continued growth. This is primarily because of the lack of need to invest in expensive semiconductor development tools, semiconductor masks, manufacturing plants/equipment, manufacturing engineering personnel, unfinished goods inventory, higher cost of finished goods inventory, etc. So except for startups backed by substantial institutional capital, it’s much easier to startup software companies compared to their hardware counterparts.

Margins
Another important area where software companies have an advantage is in margins—both in the area of typical gross margins, as well as the potential for higher net margins. This is primarily due to the negligible cost-of-goods-sold for most software companies.As a result, it easier for software companies to get to profitability, and if a large market is found, sustain profitability. Remember, throughout this article I am talking “on average”. There are hardware businesses with excellent gross margins (dominant semiconductor companies come to mind) as well. But in general, this is an area where the advantage goes to software.

Pricing
The big difference here also is related to product cost. The major difference comes down to product cost, which in the long run creates a floor for anyone who would actually like to make a profit. While optimal pricing of hardware or software should be based upon a value-based approach—with market segmentation as the key However, I rarely find this to be the case in my consulting practice—whether the company markets a software or hardware product.

In the hardware business, you tend to see a lot of simple pricing models that are cost-based. For software businesses, the negligible product cost can be the other end of the proverbial double-edge sward when it comes to pricing. In a competitive market, you may see competitors in software markets literally “give away” the initial product, and rely on the upgrade stream to make a profit downstream. This can strain the profitability of the entire segment, and in severe circumstances, can suck all the profit from the market. You see this scenario most often started by weaker competitors, or in markets where switching costs are high. While hardware pricing can be even more competitive generally, it is less likely for a weaker competitor in a hardware market to introduce a “zero-margin” program. This is because it is often tougher to hang onto a customer in the second generation (if the market has commoditized), and the market leader often has a gross margin advantage—making it an ill advised maneuver other than as an attention-getting, short-term promotion.

Distribution
The advent of the Internet has created a major difference in distribution between software and hardware companies, where there was very little difference in the past. It has made direct distribution much more practical for small software companies, in markets where a simple download is practical. For those companies which aren’t direct-only, distribution is similar for hardware and software companies. Traditional distribution through third parties tends to be very similar, although higher inventory costs are still a burden that hardware companies need to manage more closely, both for in-house finished goods and those held by the channel.

Defensible Strategic Advantage
This is an area in which software and hardware markets have both similarities and large differences. Both hardware and software companies value patents as a form of providing a sustainable competitive advantage. But in my opinion, the inherent malleability of software makes patent protection less useful in software than in hardware. It is easier to “find another way” of accomplishing the same end result when you are dealing strictly in software code. It’s also easier to segment in software markets, creating a targeted, niche version of a software product for a specific segment, nipping at a market leader without drawing their fire. It’s much harder for a small hardware company to differentiate itself this way. On the other hand, the market leader that establishes itself and creates a large volume business, creates the important competitive advantages—cost efficiencies and brand recognition are the huge, defensible advantages. So I believe this point comes down to scale—in software markets, it’s easier for a small competitor to overcome the scale of larger competitors, and develop a niche strategic advantage. While in hardware, the large competitors can use scale to create the ultimate competitive advantage.

Localization Requirements
This is an area in which hardware companies normally have an advantage. They usually have simpler user interfaces, and sometimes utilize symbols extensively in their interfaces, greatly reducing translation requirements into local languages. Hardware companies do have to deal with some physical differences in standards, such as electrical—but these have stabilized over time, and are often handled in the standard product.

Conversely, software user interfaces are usually language intensive and more complex, with thicker user manuals. This requires software companies to live with higher localization costs and longer lead times to market worldwide. The exception to this is complex software sold to highly technical users, where English is often used as the standard language.

Potential for Dominance
I’m going by mostly by empirical evidence here. It seems that there have been a lot more hardware companies who have dominated there respective businesses, for a longer period of time than in software. For every Microsoft (and there’s really only one of those!) it seems there are many more examples like Intel, Cisco, IBM, HP, Dell, etc. Hardware markets tend to commoditize more easily, but with standardization on a couple of leading brands. It’s hard to make money in the long run in hardware unless you are one of the top two or three players. Large hardware markets are also relatively larger in revenue than large software markets, allowing market leaders to more fully utilize their profit and cost advantages over competitors, by spreading marketing costs over large product volumes. So if you’re looking to build a truly dominant company, the odds are greater in hardware—although you probably are still better off heading to Las Vegas, and putting your life savings on roulette red!

There are many more ways to contrast and compare hardware and software companies, but I will end it here. What other points would you add? As usual, post a comment or send me an email message.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

2 Comments by admin on February 9, 2006
filed in B2C, Business Models, Corporate Strategy, Distribution Channels, Financing, Product Marketing/Management, Software/Product Development, hardware
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